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The Safer Way to Play Japan

You might do best just seeing what develops for now.

The disasters in Japan have taken a huge toll in lives, and done a devastating amount of damage to the island nation. Given the potential impact on the country's economy, it wasn't surprising to see stock markets both in Japan and around the world fall in response to the situation.

Some investors, on the other hand, have regarded the crisis as a big buying opportunity for Japanese stocks. That may be the case, but if you take a more conservative approach to your investing, you may prefer a more measured approach before you put your money at risk. Below, I'll tell you how you can best do that, and point you toward promising investment stories that might help you focus your search.

Getting it all sorted outAfter the earthquake hit, Japan's stock market saw its biggest two-day drop since 1987. The sell-off was relatively indiscriminate, with Toyota(NYSE: TM) sinking 5% and Panasonic(NYSE: PC) down more than 9%, as general fears of an industrial slowdown hit stocks broadly. As the extent of damage to nuclear reactors near the earthquake's epicenter became better-known, nuclear-related stocks around the world, including uranium producer Cameco(NYSE: CCJ) and power generator Exelon(NYSE: EXC), also fell sharply.

According to reports from two different fund-tracking services, the drop prompted many investors to buy Japanese stocks in force. Japanese stock ETFs, including the popular iShares MSCI Japan(NYSE: EWJ), took in close to $1 billion in net buying for the week that ended last Wednesday.

When markets misbehaveAs a conservative investor, you have to look beyond the simple moves in the markets to find their cause. Big inflows into Japan funds may seem like an unqualified positive, but according to analysts at Citigroup, a big portion of those inflows came directly from the Bank of Japan and its asset purchase program. Citigroup estimates that the Bank of Japan put $370 million into Japanese ETFs for the week.

In addition, the Japanese yen soared following the disasters. Foreign exchange traders anticipated that rebuilding companies would have to bring money back into Japan in order to spend yen. To stem the move, which sent the yen-tracking CurrencyShares Japanese Yen Trust(NYSE: FXY) to new highs, the Group of Seven (G7) countries made a coordinated intervention to reduce the yen's value.

Moves like these usually achieve their intended goal in the short run. But over longer periods of time, trends often reassert themselves, despite the best efforts of governments and other major players in the financial world. All the same, as long as the battle continues, ordinary investors can get caught up in the tug of war, and conditions can change back and forth in rapid succession. That makes it challenging to keep confidence in your position while maintaining an open mind to identify potential flaws in your strategy based on new information.

Keeping watchJumping into investments after a crisis can lead to huge profits, but they don't come without risk. In situations like this, a safer alternative is to identify investments that are potentially attractive, then keep an eye on them in the days and weeks ahead to see how things play out.

You may worry that by doing that, you'll miss out on the best prices -- but that isn't always the case. After the Gulf oil spill last year, BP shares didn't hit bottom until months after the accident. Those who jumped in early may have thought they got a bargain at 20% lower prices than before the spill, but as of now, they're still sitting on a loss. Those who waited were rewarded with even bigger bargains.

Of course, things may work out differently for Japan. But by putting investments like the iShares ETF or SPDR Russell/Nomura Small Cap Japan(NYSE: JSC) on your watchlist, along with beaten-down stocks like Toyota and Panasonic, you can get more familiar with them and get all the news that affects them in the coming weeks and months. That should help you feel more comfortable making an informed investment decision.

Take your timeSometimes, fast investors make the most money. But with complicated situations like Japan faces, no one will know the full impact of the disasters for some time. Don't just throw your money at a perceived bargain; learn about Japan by getting some Japan-related investments on your watchlist today.

Tracking your favorite investments is as easy as starting a watchlist. Our new service keeps you in touch with all your picks. Sign up now and you'll get immediate access to a new special report, "6 Stocks to Watch From David and Tom Gardner." Click here to get started -- it's all free.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributorDan Caplingeroffers his best wishes for those hurt by the Japanese disasters. He doesn't own shares of the companies mentioned in this article. Exelon is a Motley Fool Inside Valuerecommendation. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool'sdisclosure policytells it like it is.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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